Smart TaxesSmart Taxes

Paying your taxes with AmEx points a bad deal

Value assigned to reward points is low, plus you have to pay a fee.

By Kay Bell Jan 28, 2010 12:08PM

If you're filing your taxes in January, it's probably because you're going to get a refund.

 

But for folks who will be facing an IRS bill and likely filing and paying later, one credit card company is already touting its new tax payment option: reward points.

 

American Express customers who have Membership Rewards accounts can use those points to pay federal, state and local taxes. The company says the arrangement is a first for the credit card industry.

 

To make the option available, AmEx has partnered with Pay1040 and Official Payments Corp., the two firms that the IRS and most states have authorized to collect charged tax payments.

 

The AmEx offer sounds like a good deal, right? Well, maybe not.

 

To pay off $5,000 in taxes, an American Express rewards account holder would have to charge $1 million.

That's because, notes CNNMoney, it takes a "whopping 200 points to pay off just $1 in taxes."

 

That's a half-cent for each reward point. And that's about half the value the industry typically assigns to each reward point for airline miles, a popular points paying practice.

 

Still, if you're a high-roller and have racked up beau coup points on your American Express rewards program, you can cash them in at tax payment time if you want.

 

Hey, even rich people need options!

 

Writing off credit card transaction fees: If you choose to pay your taxes with your credit card instead of any points you earned on it, remember that it'll cost you.

 

Credit card companies charge a fee for each use of the card. The merchants usually absorb this, but Uncle Sam isn't allowed to do so. So when it comes to charged tax payments, you have to eat this fee, 2.35 percent of your tax payment amount, when you use either Pay1040 or Official Payments to meet your federal tax obligations.

 

Now, however, you might might be able to deduct that fee. The drawback here is that you must count it as a miscellaneous expense.

 

That means, first of all, you have to itemize.

 

Then all your miscellaneous expenses must exceed 2 percent of your adjusted gross income.

 

So the $23.50 you were charged for putting your $1,000 IRS bill on plastic probably won't do you any tax-deduction good.

But it was nice of the IRS to offer, don't you think?

 

Related reading from Don't Mess With Taxes:

 

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